Heading for September/October Buying Juncture

One crisis behind us (debt ceiling increase/deficit reduction), two more towering like a freak wave – Europe and the U.S. economy.

The market has hit a wall at my resistance in the DJIA 11,500 (S&P 500: 1208) area three days in a row and the U.S. stock-index futures indicate it will take a nasty hit at the open raising the prospects for a test of last week’s interim lows ( DJIA: 10,588 (S&P 500: 1101).

The Brussels meeting of European powers Tuesday calmed nerves, but did little to convince global markets that a solution to their sovereign debt problems was imminent. To make matters worse, Europe’s economies are beginning to falter, dashing hopes that they can “grow out” of their sovereign debt woes, bad news for the U.S. economy, as well.

Monday’s economic reports were gloomy, with the report that the Empire State Manufacturing Survey Index dropped sharply indicating the New York, Northern New Jersey and Southern Connecticut economies were struggling.

Tuesday: Housing Starts dropped 1.5%, but Industrial Production surprised on the upside with a gain of 0.9 percent. Worth noting, however, U.S. production has been recovering from the hit it took after supplies were disrupted by Japan’s earthquake in March.

Producer Prices for July were reported Wednesday, and were up more than expected, raising eyebrows.

Jobless Claims and the Consumer Price Index (CPI) came at 8:30 today. The CPI was up 0.5 percent, but Jobless Claims were up 9,000 through August 13, above projections and a sign the economy is not in a hurry to recover.

Due at 10 o’clock are the Philly Fed (area business) Survey, Existing Home Sales and Leading Economic Indicators. The latter is especially important since the markets were hammered after Jeffrey Frankel, a member of the “Business Cycle Dating Committee” of the National Bureau of Economic Research was quoted earlier this month as saying, “The sum total of the indicators over the last six months points to increased recession risk over the coming year.”*

July’s Philly Fed Survey was slightly improved after a sharp four-month slide, however Street estimates call for a decline in today’s report. Existing home sales have been dropping since April.

Yesterday, Morgan Stanley’s Chetan Ahya, cut his forecast for global growth this year to 3.9% from 4.2% saying, “The U.S. and Europe are dangerously close to recession. Recent policy errors, especially Europe’s slow and inefficient response to the sovereign crisis and the drama around lifting the U.S. debt ceiling, have weighed down on financial markets and eroded business and consumer confidence.”

Not everyone buys into the “imminent recession” camp.

Yesterday, Chris Rupkey, chief financial economist for Bank of Tokyo-Mitsubishi UFJ Ltd., said,”There’s nothing to suggest the economy is slowing, let alone declining. Production continues because consumers are still making their purchases. There are plenty of worries, plenty of fears, but so far the fears are completely unfounded.”

Neil Dutta, Bank of America Merrill Lynch in New York agrees, saying, “While recession risks are on the rise, a recession is not baked in the cake and the data bear that out.”

Add to that, Norfolk Southern (NSC) CFO, James Squires’ comments that he isn’t getting any negative feedback from his customers about the second half of the year.

My thoughts: We are heading for a September/October bottom. That can come as a double bottom in a test of the August 9 interim lows, most likely in the DJIA 10,820 (S&P 500: 1135) area.

New negatives when (and if) the market drops that far would hammer the market to new interim lows which brings into play the level I targeted in my August 1 blog – DJIA; 9,680 (S&P 500: 1050).

Neither the Fed nor the Obama administration are going to let the country slip into another recession without a huge effort to avert it. The administration is already set to release a package to boost the economy in early September. The Fed has a big pow wow at Jackson Hole a week from Friday, stay tuned.

George Brooks

The writer of Brooksie’s Daily Stock Market blog, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk

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